First Capital Real Estate Investment Trust (FCRUN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT's Q1 2022 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Alison. Please proceed with your presentation.

Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our Q1 MD&A or MD&A for the year ended December 31, 2021, and our current AIF, which are available on SEDAR and our website. These forward-looking statements are made as of today's date, and except as required by securities law, we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call. I'll now turn the call over to Adam.

Thank you very much, Alison. Good afternoon, everyone, and thank you for joining us today for our Q1 conference call. In addition to Alison, with me today are several members of the FCR team, including Jordie Robins and Neil Downey, both of who you will hear from shortly. The first quarter was very busy for FCR. Demand for our space was strong across the portfolio, and our talented team capitalized on this demand, resulting in our highest first quarter leasing volume ever and our second highest volume for any quarter. This contributed to our average in-place rental rate increasing to a record high for the 23rd consecutive quarter. While same-property NOI grew in Q1, it did so at a growth rate that is lower than our long-term average, in part due to a proactive temporary decline in occupancy. In a business like ours, vacant space fuels future growth while enhancing the tenant mix at our properties that we offer to the neighborhoods in which we operate. And Q1 was no exception as we proactively terminated all of the in-place leases at the former Walmart and an adjacent gym space in our Cedar Brae property in Toronto. We didn't have to do this as the space was fully occupied. However, redevelopments like this provide a number of benefits and are a core competency of FCR. In this case, we'll be creating up to 24 units, an extensive exterior upgrade, a new entry point and additional public space. These new units cater to the deepest levels of tenant demand given their dimensions and locations. This will result in an improved merchandising mix for the neighborhood and the space will be integrated into the balance of the center in a more functional manner. In short, there are numerous qualitative improvements. From a financial perspective, the redevelopment is compelling as we expect the increase in value from the redevelopment to be significantly higher than our cost. In addition, it allows us to also surface meaningful value in our 3434 Lawrence property across the road, which Jordie will touch on. We're also seeing positive momentum in our assets that were most impacted by the pandemic, namely our residential rental assets in Toronto, which are seeing increased leasing velocity and significantly higher rental rates than even a few weeks ago. In Liberty Village, lease rates have rebounded significantly. And over the last couple of weeks, new residential leases have been signed at rental rates that are above our pre-pandemic peak. Another asset with momentum is our hotel in Yorkville. Besides an increase in bookings and the top ADR in Toronto, the hotel has just achieved a major milestone. It was awarded a Forbes Travel Guide 5-star rating. Our property is now the only independent luxury boutique hotel in Canada to earn this esteemed accolade. To quote our team lead and hotel general manager, a Forbes 5-star is the pinnacle of achievements for hotels across the globe. Congratulations to our entire Hazelton Hotel team for their tremendous efforts, passion and perseverance, especially over the last couple of years. Brighter days are clearly ahead. The opportunity to acquire a 50% interest in the one restaurant operating business located in the hotel also presented itself during the quarter, which we took advantage of. While it's not material to FCR from a financial perspective, there is strategic value to this investment given our overall position in Yorkville. And our timing is proving to be fortuitous as the restaurant has had its strongest March and April in its 14-year history, pointing to what we expect will be an exceptional spring/summer season. Jordie will expand a bit on some of the other progress we are making in this neighborhood. There's a lot going on in the world today. It's a dynamic market with interest rates increasing to historically normalized levels and inflation running high. Many of our grocery-anchored assets are irreplaceable and that holds more true today than ever before. Replacement costs have increased and are now above market values. Supply will continue to be constrained, tenant sales are rising and demand on the leasing side remains elevated, which should bode well for future rent growth as well as downside protection on asset values in the face of higher interest rates, especially given the quality of the neighborhoods our properties are situated. As you know, in the short term, the capital markets can be emotional and volatile, which is currently the case. Our unit price is well off its recent highs and well below intrinsic value or NAV. At FCR, we are a real estate owner and operator first and foremost. We have an operating platform that has always been committed to exceptional operational standards and a real estate strategy that is proven and has delivered reliable growth over the last 25 years. We know that our prime locations in Canada's densest urban markets are in high demand from Canada's strongest retailers offering necessity-based goods and services. This combination will not only withstand short-term volatility, but continue to build future value. And speaking of standards, this quarter, we continued to advance our ESG priorities, further embedding environmental, social and governance principles into our business and culture. I'm pleased to announce that First Capital was recognized this quarter as one of Canada's greenest employers. We have been at the forefront of environmental best practices in the Canadian real estate industry for well over a decade. This award complements our 3 consecutive year placement as one of Canada's top, small and medium employers and one of Greater Toronto area's top 100 employers. Public recognition of our efforts is nice, but it is not the reason we do what we do. What makes me extremely proud is all of the incremental behind-the-scenes work that our FCR team members focus on every day to make FCR a place where people feel valued and their innovative ideas are encouraged and implemented. That brings me to our ED&I work. I've mentioned before that our ED&I Council is an employee-led team focused on implementing our mission of creating an inclusive culture of belonging, where all employees have an equal opportunity to thrive, love what they do and grow their careers. Last week, FCR celebrated equity diversity and inclusion in a special week-long signature event series with keynote speakers on gender identity and gender expression and communicating as an ally with lots of opportunity for discussion and interaction with staff. We capped off the week with a diverse panel of FCR team members from across the company sharing their lived experiences on the topic of belonging and how we can continue to be even more inclusive as an organization. Before I hand it over to Neil, I'd like to take this opportunity to welcome our summer interns who are listening to this call. We launched the internship program 4 years ago. And over that time, it has evolved into one of the most sought-after internship programs. This year, we received over 5,000 applications for 17 positions. What sets this program apart is the real world experience the interns gained throughout the summer. This culminates in the CEO's Capstone project, which is an interactive and collaborative project where teams of interns solved a real life, real estate challenge, which they formally present to the executive team at the end of the summer. Not an easy task, but invaluable experience at this stage of their careers. The program has attracted some of Canada's brightest students and has become a talent pipeline for First Capital, which is helpful given the competitiveness of the current labor market. 5 of last year's interns have joined FCR as full-time employees. These graduates now work in our leasing, technology, marketing and people and culture departments. We look forward to providing more updates on ESG in the future. And in the meantime, the ESG section of our website is regularly updated and has a wealth of information on our activities. With that, I will now pass things over to Neil.

Thank you, Adam, and good afternoon, everyone. For my prepared remarks today, I will be referring to Slide 6 initially in our quarterly call presentation. The presentation, of course, is available on our website at fcr.ca. Q1 2022 funds from operations of $55 million or $0.25 per unit was consistent with $55 million and $0.25 per unit in the prior year. Most of you are aware that our other gains, losses and expenses, or OGLE for short, tends to cause variability in our quarter-to-quarter reported FFO and this past quarter was no exception. As shown near the bottom of Slide 6, Q1 2022 results included aggregate other losses and expenses of $6.8 million versus 0 in the first quarter of last year. This $6.8 million year-over-year swing in OGLE impacted FFO per unit by negative $0.03. As detailed on the next slide, nearly all of the OGLE in the last quarter related to mark-to-market losses on listed securities. In the context of our FFO, we believe it's only reasonable to look through the mark-to-market gains and losses. And I might add our view was the same back in the second quarter of 2021 when our FFO included a $17 million gain principally from the same investments. Notably, prior to OGLE amounts, our FFO per unit increased by a solid 12% in the first quarter. In returning to the top of Slide 6, you can see that Q1 net operating income of $101.5 million was essentially unchanged year-over-year. Lost NOI related to disposition activity was $2 million in the quarter and lease termination receipts were $600,000 lower versus the prior year. Q1 same property NOI growth was $1.7 million or 1.9%. This was in line with our internal expectations for the quarter. Year-over-year growth was driven by lower bad debt expense, rent escalations and renewal lifts. But these were partially offset by lower occupancy, lower variable revenue contributions and the lower lease termination income that I noted a moment ago. On a sequential basis, Q1 net operating income was $5 million lower than Q4's $106.6 million. In our last conference call, you may recount that we cited very strong Q4 variable revenues. So during the first quarter, our business was subject to its usual seasonal variable revenue reset. But restrictions in Ontario specifically during the month of January had a greater-than-normal impact. So for context, lower Q1 2022 variable revenues hurt NOI by approximately $3 million relative to the fourth quarter of last year. Expense seasonality, including CAM and tax recoveries and certain payroll and compensation amounts represented an additional quarter-to-quarter variance of minus $1 million, while lost NOI related to Q4 asset sales was also $500,000 incremental negative to the quarter just reported. Q1 interest and other income of $5.9 million increased by $3.1 million year-over-year. Higher loan balances were a key driver. Also of note was approximately $1 million of income recognition related to a loan repayment. This will not occur in subsequent quarters. In other income, we also earned approximately $500,000 of final profit related to the closing of our Rutherford townhouse development. This is an income contribution that also will not repeat next quarter. Q1 G&A expenses of $8.7 million decreased by $550,000 year-over-year. The 2 periods are generally comparable in terms of business activity and staff complements. Of note, the prior period did include certain employee restructuring expenses. Moving on to some of our operating performance metrics and turning to Slide 8. The portfolio rounded out Q1 at an occupancy of 95.5%, while down 60 basis points sequentially from Q4, occupancy was in line with our internal budget. And it reflects the expectations that we cited on our February investor call. During the quarter, we had 96,000 square feet of tenant possessions against 104,000 square feet tenant closures. In addition, we had 158,000 square feet of GLA subject to closures for redevelopment. This included 99,000 square feet of Cedar Brae, 54,000 square feet at Stanley Park Kitchener and the final 5,000 square foot tenant at Yonge and Roselawn in Central Toronto. All of the Stanley Park area and the Roselawn area is slated for demolition. Approximately 21,000 square feet at Cedar Brae will be permanently taken off-line, meaning it comes out of leasable areas. And as such, the net vacancy impact due to Q1 closures was about 78,000 square feet or 40 basis points of portfolio vacancy. As of today, the now former 34,000 square-foot Goodlife Fitness location at Cedar Brae has also closed. This closure facilitates the property's somewhat expansive redevelopment. Upon completion in mid-2023, the gym operator will be returning to the property, and Cedar Brae will also have many new retailers and complementary tenants. Moving to Slide 9, we turn to the subject of leasing velocity. On this front, the business moved from strong in Q4 to stronger in Q1. Renewal leasing volumes were 838,000 square feet in the first quarter, up from 452,000 square feet in Q4. Renewal leases were affected at an average increase of 7.5% when measuring the first year renewal rent of $19.94 per square foot relative to a rent of $18.55 per square foot in the final year of the expiring lease. Including new leasing for future possession, Q1 leasing velocity at FCR's share was 915,000 square feet and total new and renewal leasing on a platform basis was just shy of 1.1 million square feet for the quarter. This was a record first quarter leasing volume for FCR. And to place that Q1 cadence into perspective, leasing velocity across the platform has more typically averaged 3.3 million square feet on an annual basis. While some of you will note that the Q1 renewal lift of 7.5% is below our long-term average of approximately 9%, it remains favorable relative to the annual average of our peers. Moreover, there's 3 other important points of context. The first and I hope this is part of a consistent message. We typically caution against taking too much of a REIT from any single quarterly operating or financial statistics. Secondly, during the first quarter, there was a notable percentage of fixed flat rate renewals, including the early renewals at 3 Walmart locations. These renewals cover 245,000 square feet of area, and this alone represented 29% of Q1 renewal volume. And finally, was maybe not evident within the Q1 leasing spread specifically is the significant business reduction -- business risk reduction that was achieved during the quarter. In this regard, renewal leases were completed for a total of 10 large tenant leases, which are those that we define of 20,000 square feet or more. This included 4 leases that were to mature this year and 6 that were to mature next. As such, remaining 2022 lease maturities are 1.4 million square feet today, which is 600,000 square feet or 30% lower than just 3 months ago. Moreover, we reduced our 2023 lease maturities by approximately 300,000 square feet. So risk reduction certainly has value to us, but this is about balance. Over time, our very clear objective is to capture rental upside reflecting the premium locations and the productivity potential of our real estate. As also referenced on Slide 9, our average in-place portfolio net rent reached $22.57 at March 31. This is an all-time high. Growth in Q1 of $0.15 per square foot was also $0.58 per square foot or 2.6% on a year-over-year basis. New tenant openings, renewal lifts and rent escalations were the primary drivers of growth. Page 10 provides distribution payout metrics on an FFO and AFFO basis. You will note the AFFO derivation is new disclosure for the quarter. We believe our financial statements and MD&A formally allowed for the derivation of AFFO, but we've now formalized the calculation for you. In Q1, our AFFO payout ratio of 50% was slightly higher than the prior year's 48%. Adjusting for OGLE amounts, most of which were noncash, the Q1 2022 AFFO payout ratio was 44%. On Page 11, we continue to provide our adjusted cash flow from operations measure. Recall, ACFO is calculated quarterly, but the payout ratio is derived on a trailing 12-month basis. Our Q1 2022 ACFO was $43 million. On a trailing 4-quarter basis, it was $244 million relative to $95 million of cash distributions paid for a payout ratio of 39%. Providing an update on capital deployment, as summarized on Slide 12, we invested $34 million into development, leasing and residential development during Q1. Most of this capital was invested into assets located in Toronto. In addition to investing in existing assets, we purchased 3 properties during the quarter for a total investment of $31 million. All 3 are located directly adjacent to existing properties or within neighborhoods where FCR has a significant asset concentration. As such, these tuck-ins will only make the portfolio more valuable over time. Turning to financing activities on Slide 13. During Q1, we repaid $224 million of unsecured debentures, mortgages and secured facilities having a weighted average effective rate of 4.3%. On a very short-term basis, Q1 debt maturities were funded primarily through drawings on our credit facilities and in part by retained cash. And turning to Page 14 of the presentation, you'll see a summary of some of our debt and liquidity metrics. In light of modest investment and disposition activity during Q1, there was little movement in the balance sheet or debt metrics since our Q4 report. At March 31, FCR's financial position remains strong with more than $650 million of liquidity in the form of cash and undrawn credit. FCR has no mortgages maturing until 2024. Our next unsecured debenture maturity is $250 million, and it occurs in December of this year. The REIT ended Q1 was $7.5 billion of unencumbered assets, up from $7.4 billion at year-end 2021 and a very low secured debt to total asset ratio of approximately 12%. This month, we intend to further strengthen liquidity through the placement of 2 fixed rate mortgages, which we expect will yield aggregate proceeds well in excess of $100 million to FCR. And finally, many of you will note that our Q1 held-for-sale assets totaled $252 million. This is a 67% increase from $151 million at December 31. As the year progresses, we expect to liberate this meaningful amount of capital, which we think can continue to enhance our financial position and allow us to accretively reinvest in the business. This concludes my prepared remarks. And I'll now turn to FCR's Chief Operating Officer, Jordie Robins, to provide some commentary on property investments, operations and development.

Thanks, Neil, and good afternoon. I'm pleased to say that the momentum that began in 2021 has carried forward into the first quarter of 2022. Our centers, our tenants and our business continued to perform, demonstrating the strength of our high-quality grocery-anchored portfolio. While I will speak about advancements in our investment in our development programs, I want to start today discussing our leasing program. As it forms the cornerstone of our business and as a leading indicator provides a window into operations, the future of FCR and why we remain so optimistic about our portfolio. In Q1, we completed 1.09 million square feet of leasing. As Adam referenced, this figure represents the most space we have leased in any first quarter. The leased area is made up of 990,000 square feet of renewals and 86,000 square feet of new deals. In the first year of these renewals, we secured 7.5% leasing spreads, 8.5% excluding all fixed flat rate renewals. The average rate per square foot of these renewals was $19.94 and was $25.17 excluding the 3 Walmart fixed flat rate renewals. During the quarter, we had broad-based tenant renewal activity across our portfolio, including grocery, general merchandise, home-improvement amongst others. We also renewed 10 financial institutions at close to a 10% lift. These renewals, including some with 2023 expiries, reduced some short-term risk by extending the profile of our near-term lease maturities. At the same time, we remained focused this quarter on enhancing our tenant roster with new tenants. IKEA Design Center took possession of a 10,000 square foot unit at Fairway Plaza in Kitchener. IKEA were motivated by the property, but also by the type and tenure of the tenant mix, secured by specific renewals at the center that we had completed last year. This quarter, we also entered into a lease agreement with PetSmart for an 18,000 square foot unit at Clearfield Commons and ville. They didn't have a presence in South Ville, knew we had recently renewed the grocery store lease and recognized opportunities for space at the property are rare. In Yorkville, we entered into a 7,000 square foot lease deal with Balenciaga. Balenciaga first took the former diesel space is a pop-up and shortly thereafter, agreed to execute a long-term lease. Exited leases where the tenant is not yet in possession.

And sorry for interruption, this is the operator. Mr. Robins, we cannot hear you.

8,000 square feet of GLA for redevelopment. This impacted area includes the 54,000 square foot former Walmart at Stanley Park in Kitchener. Their form of premises will be demolished to facilitate the construction of a new steel confidential 61,000 square foot national tenant. This new agreement will allow us to replace an anchor tenant who paid a flat, well below market rent with a new AAA covenant anchor tenant who will pay market rent. Commencing in late 2023, this new tenant will pay approximately 3x more rent than that, which our former tenant was paying. The downtime associated with this transition causes a blip to FFO, but the asset will be meaningfully better and more valuable because of this change. The impacted area this quarter also includes the majority of the 99,000 square foot former Walmart space at Cedar Brae Mall in Toronto. We had initially backfilled the former Walmart unit with Temp tenants, while we formulated a remerchandising plan. Now complete our -- and bring traffic to the interior of the center. This plan also serves to facilitate the redevelopment of our neighboring center 3434 Lawrence. We will be relocating all of the tenants from 3434 into the former Walmart box and accordingly free up all related encumbrances that would otherwise impede its time line for redevelopment. In light of this strategy, we now have commitments for approximately 2/3 of this re-demised space. The short-term impact to vacancy from just this project equates to approximately 40 of the 60 basis point change to occupancy in the quarter. Like Stanley Park, this work required is extensive and as described has an impact during the interim period. However, this type of remerchandising work is our bread and butter and one of the elements that differentiates FCR. Looking forward, once completed, we will have improved the quality, the average in-place rent, the FFO and the NAV of both assets. Turning to investments. It was a relatively small but impactful quarter in terms of completed transactions. We purchased approximately $30 million of strategic or tuck-in assets that completed 2 separate assemblies and added an adjacent 3 story, 17,000 square foot office property to our Liberty Village Holdings. We also sold a residual 1-acre partial of land in St. Hubert in the South shore Montreal. As set out in our disclosures, we have $252 million in held for resale. So while transactions this quarter were limited, we have been extremely active moving both potential acquisition and disposition opportunities forward. Our development program has also kept us quite busy as we continue to advance entitlements to the 23.3 million square feet of incremental density in our pipeline. This density is primarily residential and once approved will serve to support our centers in the neighborhood in which we've invested. Looking through a macro lens, there exist a scarcity of housing supply, which is driving residential demand and in turn, density and housing pricing higher. Once entitled and developed our density pipeline will also serve to address in part this affordable housing shortage. In total, we've now submitted entitlements for 16.1 million square feet of incremental density, representing just under 70% of our pipeline. In 2022, we are gearing up to submit for another 1.5 million square feet. The applications will submit this year include the Montgomery block adjacent to our Roselawn Assembly, 895 Lawrence, Midland and Lawrence and Morningside Crossing all of which are located in Toronto. Over 8 million square feet of our development pipeline is now entitled with a further 1.9 million square feet of approvals expected by year-end '22. As we've said in the past, we don't entitle our assets [ indiscriminate ]. It starts with identifying and investing in assets in neighborhoods that meet or will meet our demographic criteria. We submit for entitlements to expand our positions within these identified neighborhoods. Once approved, we have optionality, and we can either wait until we are ready, sell a partial or a 100% interest or develop this density as part of our active development program. With that in mind, I want to spend the next few minutes discussing the tremendous progress we're making in this regard. Starting in Montreal, the first phase of our Wilderton project in Kootenai is now complete. Metro opened its 41,000 square foot urban grocery store to the public on February 24 of this year. Their co-tenants, Pharmaprix, Dollarama and SAQ all opened late last year. Demolition of the remaining portion of the former center is now complete. And we plan to initiate development of a 200,000 square foot final phase in 2023. Shifting West to Toronto, our 50-unit townhome development adjacent to our Rutherford Marketplace shopping center is now complete and was registered in the first quarter. Showing an excavation is well underway at Edenbridge, our 209-unit condominium development located on the discrete portion of our Humbertown Shopping Center lands. 81% of the units are sold, 90% of the costs awarded, and we expect the project will be complete by 2025. Demolition of the existing structures at 400 King Street West, our 460,000 square foot retail and residential condominium development is well underway. Shoring excavation will commence in the coming weeks. 97% of the units in the proposed development have been sold. Sales are meaningfully above our revenue budget and critical cost elements for the project have been awarded. Demolition of the existing structures at 1071 King Street West, our 200,000 square foot residential rental project was completed this past quarter. Demolition of the existing structures on our 138 Yorkville development site and our 510,000 square foot retail and residential rental project at Yonge and Roselawn are also underway. Last but certainly not least is 2150 Lake Shore. As we had previously disclosed, Toronto City Council approved the secondary plan and bylaw for 2150 Lake Shore in 2021. This past month, we submitted for site plan approval for Phase 1 and expect to be under construction in the second half of 2024. In summary, Q1 was a very strong quarter, driven by great real estate, positive momentum and solid execution. And with that, Eric, we can now open up for questions.

[Operator Instructions] And we have the first question from Mario Saric.

A couple of quick question -- a couple of quick questions on the operational side and then one on capital allocation. So I think I know the answer. But in terms of the same-property NOI, like Adam, you highlighted it came in at 1.9%. That was anticipated given some of the vacancy that took place. Do you still think that kind of your historical average or 3% plus same-store NOI growth is achievable in 2022?

Yes. So same property NOI. So yes, no change to the -- when we look ahead, saying in general, I think the words I've used historically is we'll be disappointed if it's less than 3%. That certainly holds true. We'll say the same thing now that we did when we had a quarter with double-digit same-property NOI growth. One quarter is not a trend. The decisions we make are not geared towards any specific metric in a single quarter. So yes, generally looking ahead, that holds true. Q1 was lighter than normal. Most of it we expected, but did have a fundamental change to our view looking forward. No, it did not.

Okay. And then in terms of the lease spreads, they remained pretty strong, as you pointed out, relative to peers. Cost inflation, including utilities is really the top of the discussion these days. How do you think about the ability to protect margin these costs continue to grow, given tenants are more focused on the gross rent to pay it close to the net rent. Essentially, do you think that you can maintain margins where they are outstanding cost of it?

Yes. Yes. No, it's a good question. I mean, as you know, we're in a net lease structure. So the costs are passed directly on to the tenant. So then the sensitivity becomes, can the tenants afford the increase in costs. And then we look directly at what's happening in their business from a sales and profitability perspective. And you've seen some of our major tenants report earnings recently. Revenue trends are fantastic. Profits are great. And so yes, absolutely, we expect to be able to continue to grow our rents and the value of our properties accordingly.

Okay. And then just on capital allocation. I think it's really easy for us on this side of the ledger. Can you kind of talk about selling assets and buying back stock and given the mid-30 kind of percent trading discount of cash loss now, but I think in practice, it's probably been more complicated than that. Like how do you think about how sensitive the team's capital allocation strategy is to what's been a fairly kind of volatile cost of equity capital in the capital markets, not just surplus capital, but from a the broader REIT space. How does that impact what you do in the next 6 to 12 months?

I can tell you it's top of mind for management and the Board right now, and that's all we're going to say about that today.

[Operator Instructions] And the next question is from Pammi Bir.

Maybe just picking up on that last question. What can you share with us in terms of the initiatives underway to maybe narrow the gap to the IFRS NAV? What are the top maybe 3 priorities?

Yes, Pammi, I'm just going to repeat what I said. We're well aware of the issue. We're very sensitive to the issue. It is top of mind and certainly amongst the absolute top priorities and what's being discussed at the management table and in the boardroom. And that's all we're in a position to say today.

Okay. Maybe just shifting gears, like from a cap rate perspective, what can you share with us maybe in terms of how the investment appetite for grocery-anchored or urban assets? How does that evolving in the private markets, just given the backup in the bond yields that we've seen?

Yes. Well, look, looking at interest rates in isolation, it's very reasonable to expect cap rates to rise modestly. No concrete evidence of that thus far in the private markets. And we are very active in the private markets as you know. But I think part of that is that there's a lot going on in the world besides interest rates. So we also have inflation that's running very high, which is largely what's prompted the rapid rise in rates. And history shows that whenever interest rates rise together with inflation and in an expanding economy, hard assets like real estate do benefit. And inflation is driving higher sales to our necessity-based tenants, and that increases the amount of rent that they can afford to pay. And the inflation has also materially increased replacement costs to the point where replacement costs now exceed market value. So that, coupled with the data coming out regarding e-commerce penetration levels. I mean, it's clear that physical retail will remain the dominant mode, something we've always believed. And so those dynamics are at play. And what that's doing in the private markets is clearly, there's a very, very different view in the private markets and how they view our properties relative to the public markets. So a lot of the private market investors, they look at our assets as stable, growing, low-risk assets that are attractive relative to replacement costs and a hedge against inflation. And accordingly, there continues to be strong demand and a strong bid for our assets. And we haven't seen, at this point, an increase in cap rates for properties like the ones we own. Not to say there won't be, I think if there will, it will be more marginal because of the nature of the buyers and the amount of capital that resides in the private markets today. And so obviously we've got a different scenario unfolding in the public markets. It's the total opposite. We're selling assets at above NAV in the private markets. And we know what's going on in the public markets relative to NAV.

Okay. Maybe just shifting gears, looking at the credit facilities. There is a fair amount of drawn. Some of that, I guess, is -- also includes the unsecured term loans. But can you maybe just talk about how you're thinking about running with that balance versus terming some of that out?

Yes Pammi, it's Neil. I think in short, you should look at that as a bit of a snapshot in time. Firstly, I did reference some mortgages that were in advanced state on. So those mortgage funds upon receipt would be directly applied to our lines of credit. And then, secondly, obviously, you can see the change in the held-for-sale pool, which is up materially. And I think that should give you a good indication as to the volume of capital that we expect to be to liberate out of those assets and turn into cash. So the drawings on the lines of credits are higher than usual. They're not high. There's still significant availability. But there really is a short snapshot in time that you're looking at.

Just on the mortgages, Neil, the ones that you decided that are in the works, what sort of rates would those be like the range?

Yes. So I would say in terms of guidance, you should think about a spread off of a longer-term maturity in the 7 to 10-year range of around 160-ish basis points. Now notably, we are hedged on around an $80 million position in terms of our interest rate exposure. So those bond forwards were put in place a while back. And upon funding the mortgage based on today's rates, those bond forwards save us about 125 basis points off the face rates. So we do have some protection there.

Okay. Just last one with the ratings agencies and there, the leverage targets that they've kind of indicated in their reports. What can you share with us in terms of, I guess, the ability to hit those targets perhaps within the time frames that they've cited?

I think the short answer is we're heading into a rating cycle here again. And it's our intention to meet with the rating agencies and give them an update not only on what we've achieved, but what our business plan looks like through the balance of this year and in some cases, beyond.

The next question is from Tal Woolley.

Just in the held-for-sale portfolio, it looks if I'm reading the disclosures right that most of this is income-producing. Are these stabilized assets so we can assume a 5%, 6% yield on it? Or are they assets that are sort of wind down, so there's not that much income attributed to them?

There's a mix. But I can tell you the IPP assets have a significantly lower yield than the yields that you just referenced significantly.

Okay. Perfect. And then, just on the distribution question. How is the Board thinking about where that should be going forward?

Yes. We really don't have any change from when we first made the adjustment. There's a number of factors that play into that decision, including constraints vis-a-vis distributing taxable income, which has been on the rise for FCR, so no change, Tal. Our expectation is that heading into 2023 after the 2-year time frame, we're going to do what we said we expected to do, which is increase it to a level that's similar to what it was prior to the adjustment. And yes, again, there are certainly some tax constraints that limit flexibility to do anything different than that.

Okay. And obviously, some of the other questioners have asked about how you're looking at your cost of equity capital. I'd rather ask the question in a different way. I guess, if there is demand in the private market for these assets, is the company or the Board looking at maybe a more significant restructuring of the portfolio, potentially disposing a more significant amount or maybe even looking at pursuing a bigger strategic alternative path?

Yes. Look, it's a big deal for us. It's not logical based on the quality of the real estate and the fundamentals of the real estate and the demand for the real estate and how it's been valued in the private markets. And so yes, all I can tell you is the top priority, and that's all we can say today.

The next question is from Sam Damiani.

2 questions on dispositions. Firstly, just on the held-for-sale bucket. It was up about $100 million quarter-over-quarter. Is that just new assets being put in the bucket? Or were there some assets swapped out from what the bucket looked like at the end of the year?

Yes. There was a little bit of in and out, Sam. There were a couple of assets that still may be possible to transact. We were more proactive saying potentially not right now. They came out and part of what impacted that is some others that we viewed at least short term as more attractive that we did put in.

Okay. That's helpful. And lastly, just again on sort of a similar questioning that a number of us have been sort of directing at here. Like what is holding FCR back from putting more assets on the market over the last, say, 6, 9 months?

Well, I have to say that certainly relative to our peers, not that I think that's overly relevant. I think we've transacted in a very significant way and are positioned to continue doing that. So look, the answer to your question, there's a lot of moving parts that get factored into how much we pursue in terms of dispositions. It's been meaningful. We've reduced our leverage by 350 basis points in the last 12 months. We've grown our NAV. We moved a lot of things forward on the development side. And importantly, when we start looking ahead medium term because a lot of the stuff we do, like this is a generational business. So the seeds we plant pay benefits down the road. We've continued to do a lot of that. So there are a lot of factors that go into it. And yes, hopefully, that answers your question, Sam.

There are no further questions registered at this time. I would now like to turn the meeting over to Adam Paul.

Okay, great. We appreciate everyone's interest in FCR and taking the time to join us today. Thank you. Have a wonderful afternoon.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.